Historical Development of

Environmental Economics
Dr. Anup K Mishra
DAVPG College
Lecture -1
 Introduction
• Environmental economics is a sub-field of 
economics that is concerned with environmental
issues.
• ... Environmental Economics ... undertakes
theoretical or empirical studies of the economic
effects of national or local environmental policies
around the world ... . Particular issues include the
costs and benefits of alternative environmental
policies to deal with air pollution, water quality,
toxic substances, solid waste, and global
warming.
….different from ecological economics
• Environmental economics is distinguished
from ecological economics in that ecological
economics emphasizes the economy as a
subsystem of the ecosystem with its focus
upon preserving natural capital
 Origins of environmental economics
• Environmental economics developed in its
present form in the 1960s as a result of the
intensification of pollution and the heightened
awareness among the general public in Western
countries about the environment and its
importance to our existence.
• Economists became aware that, for economic
growth to be indefinitely sustainable, the
economic system needs to take into account the
uses of the environment that we have already
mentioned, so that natural resources are not
depleted and so that the environment is not
overused as a waste sink.
• The growth of environmental economics in the 1970s
was initially within the neo-classical paradigm.
• In general, this approach to the environment is
concerned with issues of market failure, inappropriate
resource allocation, and how to manage public goods.
• There was little concern for the underlying
relationships between the economy and the
environment.
• Concerns about the limits of this approach to
environmental economics led some environmental
economists to develop what is now referred to
as ecological economics.
 Early History
• Early classical economists, Adam Smith (1776) and
David Ricardo (1817), contain no explicit reference to
environmental issues in the context of the provision of
public goods.
• Why is this?
• First, it is reasonable to assume that the process of
industrialization and urbanization had still not progressed
to the point where social thinkers had begun to recognize
the magnitude of its effects on the physical environment.
• Moreover, environmental issues were not yet regarded as
belonging to those aspects of social development that
economists were expected to analyze.
 Malthus: Theory of Population
• Thomas Robert Malthus’ theory of population (Malthus 1798) implies that
the natural tendency of population to increase exponentially is
constrained by decreasing returns in agriculture.
• Malthus argued that in the long run, population could only increase in
step with the expansion of agricultural output.
• Moreover, the long run equilibrium level of wages would correspond to
the subsistence level.
• This is because, if in the short run population were to increase at a faster
pace than that which was consistent with the long-run sustainable level,
forces would be unleashed to check it, such as
• “… unwholesome occupations, severe labour and exposure to the
seasons, extreme poverty, bad nursing of children, great towns, excesses
of all kinds, the whole train of common diseases and epidemics, wars,
pestilence, plague, and famine.” (Malthus [1798]1992, 23)
• This may not be environmental economics as we conceive of it today.
Nevertheless, it does reflect an awareness of the feedback from the
physical and man-made environment to human productivity and the
standard of living, which clearly foreshadows present concerns.
 Ricardo: Resource Scarcity and Economic Growth
• In his Principles of Political Economy and
Taxation (1817), David Ricardo accepted
Malthus’ theory of population but emphasized a
different aspect of the connection between the
natural environment and the standard of living.
• His theory of land rent was based on the
assumption that agricultural land varies in terms
of fertility.
• More specifically, he argued that as the demand
for agricultural produce (“corn”) expands, land of
progressively lower fertility is brought into use,
and thus the price of corn is determined by the
cost of production on the least fertile land.
 Mill: The Tasks of Government
• The classical school of economics is usually
considered as ending with John Stuart Mill.
His Principles of Political
Economy (1848) consolidated the classical
approach while also breaking new ground in a
number of ways, both analytically and by
broadening the scope of economic analysis.
• In modern terminology, Mill emphasized the
public good nature of the natural environment
and pointed out that the management of this
cannot be left to market forces and individual
action.
 Natural Resource Scarcity: Jevons and the Coal
Question ( 1871)
• The main theme of The Coal Question was
that England’s economic development was
bound up with exponential growth in
industries that were dependent on coal as a
source of energy.
• However, Jevons argued that coal could no
longer be extracted at a speed that would
allow this growth to continue, that the lack of
coal would act as a brake on the country’s
economic growth, and that it was therefore
necessary to rethink its national strategy.
 Pigou and the Foundations of
Environmental Economics
• Pigou (1928)significantly extended the scope
of the theory, particularly to include
externalities in consumption.
•  He also analyzed how the choice of policies,
particularly taxes, could improve the efficiency
of resource allocation.
• In addition, he discussed the empirical
measurement of environmental damage,
 Welfare Economics and Externalities
• The theory of public goods as first presented
in the framework of welfare economics
in Samuelson (1954) is of obvious relevance
for environmental economics.
• The examples of unspoiled natural beauty and
unwholesome factory smoke, as discussed
by Mill (1848, 1972) and Pigou (1920),
respectively, fit directly into this framework,
as do our present-day concerns about
biological diversity and global warming.
 At Present
• Ecological economics views the relationship of the
economy and the environment as central.
• Thus, any analysis places economic activity within the
environment.
• This distinction is best illustrated with reference to
debates concerning sustainable development and the
difference between weak and strong sustainability.
• Ecological economics supports the notion of strong
sustainability. This view of sustainability assumes that
not all forms of capital (ie human and natural) are
perfectly substitutable.